Is Superfund a “bill of attainder”?

Rep. Carolyn Maloney is circulating a bill that would try to claw back bonuses taken by employees of firms that had to be bought by Uncle Sam. I’d quibble with the terms of her proposal, and, although I’ve suggested something like it myself, I’m not sure this is a road we want to start down.

I am sure, though, that this idea — levying a special tax on people who were paid very large sums of money in recent years by firms that have been expensively rescued by the Treasury — deserves to be a part of the mainstream debate. Let it be thoroughly vetted, then enacted or rejected after careful consideration.

Conor Clarke suggests that such a bill would be unconstitutional on its face. I think he’s wrong about that. He cites the following line from the US Constitution:

I am not a lawyer, but I don’t think this prohibition would much apply, as long as the tax is civil and remedial in nature, rather than criminal and punitive. Consider the so-called “Superfund” law, which made polluters liable for cleaning up environmental messes, even though that liability may not have been written into law at the time when the polluting was done. The current banking crisis strikes me as quite analogous to the Superfund situation: A large class of private actors have caused harms that must be remedied. While the state has no choice but to pick up some of the tab, it also identifies the responsible party and holds them partially liable for the mess they have made. We even use the same words: It’s all about “toxic waste”.

Thanks to Google books, I can quote Daniel E. Troy, of all people, the former chief counsel of George W. Bush’s FDA. (There’s something fitting and ironic about that. Look him up.) In Troy’s book Retroactive Legislation (1998), he writes

Carefully assessed, the argument that CERCLA [Superfund] is unconstitutional is in tension, at least, with the Supreme Court’s current interpretation of the ex post facto and bill of attainder clauses. It may also be at odds with the original understanding of those clauses.

A Bill of Attainder? The contention that CERCLA violates the bill of attainder clause may be dispensed with easily. Under the Supreme Court’s current case law, the class “responsible parties” is almost certainly not sufficiently small to warrant treatment as a bill of attainder. The Court, which has not struck down a law under the bill of attainder clause in thirty years, is not likely to consider CERCLA a “legislative punsihment . . . of specifically designated persons or groups.” Moreover, as we have seen, the bill of attainder clause was originally understood to prohibit laws that affected life and liberty only.

An Ex Post Facto Law? Because the ex post facto clauses do not apply to civil laws, Superfund therefore would have to be characterized as punitive in nature to be classified as an ex post facto law. The current Court, though, has suggested that unless a law is exclusively punitive, it will not come within the scope of the ex post facto clauses. Although CERCLA certainly has a punitive element, it is hard to contend, under the relevant Supreme Court test, that it “may not be fairly characterized as remedial, but only as a deterrent or retribution.” [emphasis original]

Speaking personally, I might prefer that Clarke’s naive interpretation of the Constitution were binding. Again, I don’t like the taxback approach, it puts us on a slippery slope to a lot of things I’d find disagreeable. But then I also dislike it when idealistic protections apply to the wealthy and well-connected while ordinary people have their vehicles forfeited ‘cuz the cop said he smelled pot. And the scale of the injustice to be remedied here viz the financial system is immense. I think we should carefully consider all our options, and hire very good lawyers. We certainly oughtn’t take the CEO of AIG’s word for it that nothing can be done.

The law may be the law, but it is also a battlefield upon which people play to win and hypocrisy is everywhere. I’d like to be idealistic, but if that means a kind of “unilateral disarmament” under which the least idealistic run roughshod, we’d better try a different strategy.

A suggestion for Congress: Tax clawback proposals should be written to apply to a rational and preferably large class of people — singling out AIG bonus recipients won’t fly. I’d suggest setting specific support criteria for firms (e.g. firms to which at least $2B of Treasury funds were provided or $10B of assets guaranteed, with support not returned or relinquished prior to September 20, 2009), income floors for individuals (e.g. applies only to income over $1M in any year between 2004 and 2009), a high but not outrageous tax rate (maybe 50% of earnings above $1M, not 100%), and a generous repayment schedule (payment of taxes under the act due can be spread over a five-year period). All in all, a proposal should be a reasonable means of identifying agents who benefited extensively from activities that induced a government bailout and asking them to contribute alongside taxpayers to a remediation effort.

Update 2: The excellent and widely read Kevin Drum writes about an ex post tax on bonuses, and seems broadly supportive. This idea may yet get a mainstream, public vetting. Drum quotes a Washington Post story

In the House, Reps. Steve Israel (N.Y.) and Tim Ryan (Ohio) introduced the “Bailout Bonus Tax Bracket Act” to create a 100 percent tax on bonuses over $100,000 that are distributed to employees of financial firms receiving federal bailout funds.

This is the most sensible variant so far pursued, but I think going for 100% is too aggressive if the good Representatives are not just grandstanding. Senators Harry Reid and Max Baucus would tax 98% of AIG bonuses only, which I think is not a good idea. (It’s narrow and punitive, so it might not pass constitutional muster, and it scapegoats AIG employees only rather than getting the gatekeepers of systemically important financial institutions broadly, the group that should really be held responsible.)

Update 3: Conor Clarke responds, and gets an opinion from Harvard law prof Laurence Tribe to boot. I think it’s safe to say that this idea is under consideration in mainstream policy circles. Megan McArdle expresses some concerns. Felix Salmon turns populist.

15 Responses to “Is Superfund a “bill of attainder”?”

There’s a Supreme Court case from early in the life of the current BK Act where Rehnquist says that a certain provision must be read as prospective only so as not to touch the question whether retrospective application would violate the Fifth Amendment. In a concurrence by Blackmun, there is a power footnote that catlogs any number of cases where the court has blessed ex post applications.

Buce — Thanks. I think that case is available here, and the “power footnote” would be footnote 10. A quick read-thru (by an amateur) suggests that the justices were concerned that an ex post elimination of a lien on debtor collateral could constitute an impermissible taking, because a lien is property, while they acknowledge that changes to non-property contractual rights can be and frequently are applied ex post in bankruptcy law. They decide that the question of whether the elimination of a lien is serious enough to avoid deciding if they can get out of it, which they do by noting that it is unclear Congress intended this part of the law to apply to pre-existing liens. If I’m reading this right, there’s a bit of an asymmetry that biases the application of ex post laws in favor of creditors. Debtors, in general, only have malleable “contractual” rights, while creditors have those but also sometimes property rights that may be immune to ex post alteration. So it might be easy to pass an ex post 2005 bankruptcy reform, but very hard to pass a retrospective law that undoes that same reform. All this is under the “takings” clause under the Fifth Amendment, and the core question is found to be serious, but is left explicitly undecided. (Was it decided in later cases?) To what degree to “takings” law and tax law intersect? If a tax on the recipients of high-level compensation from bail-out-extracting banks is not a bill of attainder, is it a taking?

Kady — As always, I enjoyed reading your post. And I very much agree — nothing pisses me off more than the way some people (usually on the Atlantic blogs) go all Victorian and moralistic on individual debtors, while they understand that banks and corporations generally must take business decisions to maximize shareholder value, subject only to the enforcability of contracts under law. It’s a funny, although not entirely ridiculous view: since corporate executives are fiduciaries for shareholders, they are morally obliged to play hard and screw counterparties when it is net advantageous, otherwise they are screwing shareholders. Individuals, however, are fiduciaries only for themselves, so the immorality of screwing counterparties because you can is balanced only by self-interest. Therefore, morality demands that individuals live up to the spirit of contracts while corporations make use of all means legal to escape unfavorable contracts. Colorable, but perverse.

I object to the “great minds” thing. It applies to you, of course, but I’ve trademarked “small and narrow” as descriptors of my own cognitive organ.

Doesn’t the federal government OWN 79.9% of AIG? One would think a simple phone call would suffice here.

All of this talk of “the sanctity of contracts” is starting to turn my stomach. When GM got into trouble and went looking for a bailout, rewriting the contracts with UAW workers became the first imperative. Also, last I checked, the federal government has no contractual obligation to bail out any of these companies. Some of these firms are getting a little brazen – if not AIG and the bonuses, then the Chairman of Wells Fargo publicly calling the stress tests assinine.

Obama needs to shoot one of the hostages now. Send a message that he’s in charge and the shenanigans will stop. Determine which of the big firms poses the least systemic risk, secretly take steps beforehand to mitigate the impact as much as possible, and then pull a Lehman on it.

Just to repeat what I wrote on your “take back the money post” in case my comment was too late to be read by many. In my view, some sort of clawback would be very beneficial, because, besides raising some much needed tax revenue, it would show that, whatever the letter of the law, society will not let people get away with large rewards from breaching its spirit. In my opinion, the present discussion about laws, rules, structures etc is largely a waste of effort, because after this scare, it will be many years before such measures are binding, and then they will be circumvented or repealed like Glass Steagall was. In other words, if I use economic jargon correctly, a clawback policy is time consistent or subgame perfect in a way that closing the stable door after the horse has bolted is not. By the way, I first suggested a financial windfall tax on your blog back in August last year (your Financial System Failure and the Paradox of Thrift post, comment at 3.11pm on 3rd August).

The legal references given in this post are much appreciated – it is useful to know exactly what the obstacle to retrospective legislation is supposed to be. For what the opinion of a non-lawyer is worth, I agree that the prohibition does not seem to apply to taxes.

Yes, we wouldn’t want the letter of the law get in the way of our justifiable desire for retribution.

And why are we even worrying about constitutionality anyway? If the majority supports it, we can have the courts interpret that dusty document in any manner to fits the desired outcome.

As for worrying that such actions might come back to bite us on our asses, I think this worry is deeply overblown. What are the chances that someone might want to violate our constitutional rights in the future? Practically nil, certainly.

> a bill that would try to claw back bonuses taken by employees of firms that had to be bought by Uncle Sam

this would backfire in practice.

if i was running a firm, and i had received a few good years of compensation in the past few years and the firm was suddenly insolvent in a way that was visible to me as CEO but not the rest of the world, what would i do?

why would this not encourage more extreme risk taking? if i knew i was facing a high likelihood personal bankruptcy but still held some cards, i would play those cards in the time remaining before i was found out.

How about we compromise instead, and retroactively tax at 100% the salaries of all elected officials and political appointees (i.e. those above the civil service level) who sponsored, endorsed, voted for, signed, or implemented TARP, the (so-called) stimulus package or any similar distribution of federal funds in recent months?

A key issue here is the definition of “punitive.” How is a 90% tax not punitive? What is the purpose of this tax? To obtain reimbursement of bailout funds? Or to demonstrate disapproval of bonus policies (even when contractually obligated) of, not bailed-out corporations, but of their fat-cat top executives? Sounds REALLY punitive to me.

Since this act would be applicable to individuals who received bonuses, this IS a small group issue, not corporate.

Any legislation which strips life, liberty, or property from anyone, as a result of condemnable behavior, can be reasonably considered to be “criminal” in nature, rather than “civil”. Perhaps the corporate entities committed the “crime” of distributing bonuses after taking government bailout funds, thus misusing them, BUT the classic legacy bill of attainder did that as well, taking property or jailing beneficiaries of “attainted”, being considered as guilty as the primary target of such legislation.

It’s a bill of attainder. It’s punitive. It’s unconstitutional. Of course, the judiciary doesn’t much seem to care about the Constitution anymore. I doubt they’d even bother to hear the case.

Re: Updates. Why bother anyway? We’re talking a small fraction of ONE billion dollars, and several HUNDRED billion dollars have been “misused”. It’s a gesture, and a pitiful one at that! Take back ALL the bailout funds. Or even half. That will be a MUCH bigger gesture.

Why be angered by it at all? If you loan money to someone to keep them from going under, and they spend some small amount on luxuries, mostly because they previously promised to, but to some extent because they couldn’t handle a total budget slashing, do you really have a right to demand back the cost of that one movie, concert ticket, trip, or whatever? But this was all known to Geithner and Dodd before they acted on it, and I don’t think Paulson much gave a crap. So why target the recipients of those bonuses?

I like David N.’s comment. Target those responsible. It’ll never happen, of course. They’ll all get re-elected or reappointed.